Prominent analyst Hao Hong, Chief Investment Officer of Lianhua Asset Management, delivered a speech titled "Outlook 2026: Holding and Benefiting" at the China Chief Economists Forum annual meeting on January 11.
Hong stated that it is highly likely the Federal Reserve will continue to cut interest rates in January. He pointed out that short-term liquidity in the US is becoming tight, with repo rates even exceeding the benchmark rate, which is forcing the Fed to persistently expand its balance sheet and reduce rates. Simultaneously, he suggested that long-term US inflation expectations are unlikely to decline. If the Fed insists on cutting rates while inflation expectations remain elevated, it could weaken confidence in the US dollar and drive up prices for precious metals.
From a trendline perspective, gold is at a relatively fair valuation, around $4,500 per ounce. However, within a new credit system, gold serves as the "anchor" for all valuations. Regarding price targets, Hong remarked that "the target is as high as the cup is deep," indicating that silver's upward trend is not yet over, a view consistent with his previous stance. Although he suggested taking profits when silver surged past $80 per ounce, he remains bullish on its medium-term upside potential. Silver has indeed experienced significant price volatility since then.
His global liquidity indicator model shows that global liquidity conditions are continuously improving, with the liquidity indicator leading fundamental changes by 6 to 12 months. Hong emphasized that against the backdrop of persistently loose global liquidity, asset classes anchored to gold will broadly benefit. He also judges that 2026 may represent the peak phase of a major cycle for stock market returns. Accompanied by synchronized easing from global central banks, there is a high probability a major bubble will emerge. Such bubbles, he noted, present opportunities for investors to alter their fortunes.
Furthermore, in a recent Bloomberg interview, Hong expressed optimism that in an environment of abundant liquidity, all assets are favorable. He believes gold and silver will continue to rise after consolidation, and the Chinese yuan has significant appreciation potential beyond current levels. He advised focusing on themes such as technology, industrial systems, and consumption outlined in China's Five-Year Plan.
Key points from Hong's presentations are summarized below:
The Fed is highly likely to continue cutting rates in January. The rationale stems from the contraction of the Fed's balance sheet from a peak of approximately $9.1 trillion in 2022 to just over $6 trillion currently—a reduction of about $3 trillion. This tightening has coincided with a decrease in new job creation in the US economy, indicating a tangible impact, particularly on lower-income groups. However, the S&P 500 index has continued to climb steadily, supported by rising corporate earnings, suggesting the rally has fundamental backing. With the Fed's balance sheet now around $6 trillion, short-term liquidity has become strained. Repo market activity dipped to around $100 billion, a very low level, while repo rates surged significantly above the Fed's benchmark rate. As the repo market is a critical source of short-term funding, difficulties there can affect various financial market operations, such as basis trades popular among hedge funds, leading to substantially higher financing costs. Therefore, looking ahead to 2026, Hong believes the most predictable outcome is that the Fed will continue expanding its balance sheet and cutting rates significantly—a process already underway. A January rate cut is highly probable, and an announcement regarding the next Fed Chair candidate is expected. If a close ally of Trump assumes the role, the likelihood of continued and substantial Fed rate cuts increases greatly.
In the new credit system, gold is the anchor for all valuations. Examining gold's price chart over nearly 40 years reveals a very standard "cup and handle" pattern. Statistically, when this pattern appears, the probability of a subsequent price increase is nearly 100%. Is $4,500 per ounce high or low? From a technical analysis perspective, "the target is as high as the cup is deep." The current trendline suggests $4,500 is a relatively fair valuation. However, if the Fed persists in cutting rates and expanding its balance sheet while long-term inflation remains uncontrolled, the credibility of the US dollar would be undermined. This could lead to a pre-Bretton Woods scenario where gold prices all valuations, as it did for oil before 1972-1973. Historically, gold has been a primary currency for millennia; thus, if gold holds its value, other assets are likely to rise.
Using the same "cup and handle" logic, silver has not reached its peak. Silver's chart shows a massive 60-year "cup and handle" formation, even more textbook than gold's 20-year pattern. Therefore, $80 per ounce is likely not the ceiling. Observing market ratios, such as gold/silver, gold/copper, and gold/base metals, these remain near historical lows. If $4,500 is fair for gold, other metals have significant potential. New highs are meant to be bought; fear of heights often leads to missed opportunities.
Global liquidity conditions are rising. This analysis is not purely technical. A proprietary global liquidity indicator, synthesizing hundreds of liquidity and monetary metrics from major economies, shows liquidity continues to improve. As Keynes noted, "Money is the bridge between history and the future." Predicting future asset price trajectories requires understanding monetary conditions. By late December, global liquidity was again rising. Similar to the Fed's impetus for easing, the People's Bank of China is also entering a balance sheet expansion cycle. Combining conditions from major central banks shows global liquidity is increasing. This liquidity indicator leads global asset prices by 3-6 months and fundamental economic changes by 6-12 months, making it a powerful long-leading indicator. Thus, silver's rally is clearly not over, as liquidity conditions are set to improve further.
2026 likely marks a cyclical peak, a time to change one's fortune. The S&P 500 return cycle exhibits a 35-year rhythm, with troughs in 1939, 1974, and 2009. Each 35-year major cycle comprises two 17-year medium cycles and ten 3.5-year small cycles—a pattern too precise to be coincidence. The last trough was 2009; 2026 is approximately 17 years later, suggesting we are at the cycle's peak. Typically, interesting phenomena occur at cycle peaks: bubbles form, forgotten assets surge wildly (even base metals with weak fundamentals), and new asset classes like digital currencies boom. Therefore, the cycle peak is an opportunity to alter one's destiny. The year 2026 is the Year of the Horse (Bing Wu) in the Chinese calendar, associated with strong Yang fire energy, symbolizing a potent and prosperous period. With global central banks—including the Fed and PBOC—easing simultaneously (the Fed's actions creating room for China's easing), and the Bank of Japan hiking rates slower than inflation rises (making its tightening ineffective and leading to a weak yen), exceptionally abundant liquidity under these "three fires" creates a high probability for a major bubble to emerge. As noted, bubbles present chances for investors to transform their fortunes.
Highlights from Hong's recent Bloomberg interview:
Market sentiment is warming, with signs of cyclical recovery. Leading sectors include technology, advancing at full speed, and industrial metals, performing strongly. This suggests many industrial stocks are rebounding, giving a sense of cyclical recovery even before economic data confirms it. Investor sentiment has improved, discretionary funds are available, and participants are ready to re-enter the market. Liquidity remains positive and is still increasing, creating a favorable environment for risk assets.
After consolidation, gold and silver are expected to continue rising significantly from current levels. The Chinese yuan also has substantial appreciation potential beyond recent gains. Commodity prices are breaking to new highs.
In an environment of abundant liquidity, all assets are attractive; the difference lies in the extent of their gains. Therefore, Hong remains bullish on industrial commodities, gold, silver, Chinese tech stocks, and the yuan. The trends that started late last year are expected to continue.
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